Exclusive-Sri Lanka central bank sees no need for further rate hikes this year, governor says

Sri Lanka's central bank foresees no need for additional interest rate hikes during 2023, according to Governor P. Nandalal Weerasinghe. Inflation is anticipated to stabilize around current levels, with the bank remaining vigilant for any unexpected developments. The May hike, the first increase in over three years, was a proactive measure to curb inflation, which has been driven by energy price rises due to the Iran conflict.

Weerasinghe stated that the May hike was a response to an expected 7% inflation rate, which is currently aligning with projections. He emphasized that future tightening or loosening decisions will be contingent on whether actual inflation deviates from initial forecasts. Inflation surged to 7.3% in July, the highest increase in three years, with some analysts predicting a potential 8% rate in November.

Weerasinghe anticipates that the full effects of the May rate increase will manifest within 12-18 months, and that inflation should return to the 5% target by the first half of next year. The bank's next interest rate decision is scheduled for September 30. Analysts noted that the May rate hike may pose risks to the fragile IMF-supported recovery.

Sri Lanka's economy expanded by 5% in both 2024 and 2025, following a financial crisis in 2022 that saw a 7.3% contraction. While the bank maintains a hawkish stance, citing low inflation as a prerequisite for future growth, it expects growth to range between 4-5% in 2026. The International Monetary Fund has supported the bank's rate hike, agreeing to release $695 million from a $2.9 billion program, with projections suggesting Sri Lanka could still achieve 3% growth this year.

Maintaining robust foreign exchange reserves remains a priority, with the central bank aiming to increase reserves to approximately $8 billion by year-end from the current $6.6 billion.